New views on complementarity and substitutability*

By treating the distribution services provided by retailers as fixed inputs into the household’s production activities, we obtain a number of new results with respect to the own and cross-price elasticities of demand for items in a retail assortment as well as with respect to a new concept the distribution services elasticity of demand for items in a retail assortment. This treatment of the household production model shows that there are pervasive tendencies toward gross complementarity among items in any given retailer’s assortment as well as between the items in any given retailer’s assortment and the distribution services offered by the retailer. These tendencies are instrumental in understanding the nature of competition among retailers and the creation of retail agglomerations.